Accounting Introduction
Accounting gives people useful information so they can make rational decisions.
Usually, this information comes from financial statements. A financial statement is a report providing financial statistics relative to a given part of an organization’s operations or status. The two most common financial statements are the balance sheet and the income statement.
A balance sheet helps users understand the status of the business by listing the types and amounts of assets, liabilities and equity. Assets are the properties or economic resources owned by the business. Liabilities are the debts.
Common assets are cash, accounts receivable, merchandise for sale, equipment and land.
Common liabilities include credit or accounts payable, employee wages, taxes payable and interest payable. Liabilities represent a claim against the business.
Assets are received, liabilities are paid.
Those that owe money are called debtors. Those who have a right to receive payment from a company are called creditors.
Equity is the interest left after the the liabilities have been deducted from the assets.
The income statement is important because it shows whether the business earned a profit. The income statement compares the revenue of a business with it’s expenses. If the revenue is greater than the expenses the business has equity or a net income. If the expenses exceed the revenue a net loss has occurred.
Revenue is assets received in exchange for goods or services as part of the central operations of the business like products sold or earnings from investments.
Expenses are what uses up assets as a result of business operations.
It’s important to note that while accounting is known for tracking money it also tracks time. Money on it’s own is not an indicator of success. Money within the framework of time gives a clear picture of what’s really going on.